Fear of further contraction in the UK and the fiscal cliff issue remains unsolved

Tom Tong05/Dec/2012Currency Updates

GBP

Cable managed to reach a month high yesterday after slowly edging higher against the greenback since mid-November.

The gain in sterling yesterday was accomplished even though the only data release yesterday from the UK provided a negative indication. It was the Purchasing Manager Index for the construction sector that came out with a downside surprise and analysts said there was almost nothing positive to draw from the information, the sectors confidence levels are at the lowest since the height of the financial crisis back in 2008.

There is now a significant worry that we will see a fourth consecutive quarter of contraction in the construction industry and with poor manufacturing data recently the increasing fear of the UK being pushed back into recession.

Yesterday the bank of England called on the banks to raise capital levels and the FSA to monitor the reports on banks’ capital levels more closely, This is for the banks to have a buffer in order to absorb losses and ensure credit availability even in events of stress.

Today there is Purchasing Manager Index data to be released on the Services sector and it is anticipated to improve slightly.
Then the Autumn Forecast Statement from the government is to be released which provides an updated outlook on the UK economy and indications of the governments budgeting for 2013.

EUR

The common currency also traded at a month high against the dollar yesterday after edging up against the greenback since mid-November.
The France – Germany disagreement regarding the Euro Banking Union is still unresolved as of yesterday when the plans were scheduled to be finalised, Germany is still pushing for only the largest banks to be monitored from the European body and smaller banks to remain under national control.

Yesterday Spain’s unemployment figures came out better than expected for November with only 74,300 people unemployed, compared to an expected 90.000.

Today there is a relatively large amount of data to be released from the Euro-zone, a number of purchasing manager indices both for Germany and the Euro-zone is expected, most of it anticipated unchanged.

The most important figure released today is most likely to be Euro-zone retail sales which is also anticipated to remain unchanged.

A unified surprise in any direction in these groups of data is likely to bring volatility today.

Then in addition there is Spanish Bond auctions to be held for 3, 7 and 10 year bonds.

USD

The looming fiscal cliff and the incapability of the two parties to unify on the issue has been the largest suppressor of the greenback since the election last month and evidently both the EUR and GBP has been gaining on the dollar since.

The republicans proposed a deal that would cut the deficit by 2.2 trillion USD, mainly from cutting public spending, increase tax revenue without raising tax rates through indirect taxation. The deal was rejected as it in real terms lowers the tax rates of the wealthy bracket and lets the middle and lower income classes bear the real cost. This further highlights the difference in the political stance of the parties on the issue. Analysts are sceptical that a conclusion can be made before New Year and the issue will keep bothering the greenback.

Today is a big day for the dollar in terms of data, first up is the Non-farm employment report which serves as an indicator for the Non-farm report on Friday it’s anticipated to show another 129,000 jobs in November, it is worth noting that the last five reports have been released with an upside surprise, and with seasonal employment picking up in anticipation for Christmas, many expect the same.

Then in addition there is a number of data sets including factory orders, unit labour costs, mortgage applications and commodity inventories.

Print

Written by Tom Tong

Vestibulum id ligula porta felis euismod semper. Donec ullamcorper nulla non metus auctor fringilla. Cras justo odio, dapibus ac facilisis in, egestas eget quam. Morbi leo risus, porta ac consectetur ac, vestibulum at eros. Donec ullamcorper nulla non metus auctor fringilla.